The Quality of Monetary Policy and Inflation Performance: Globalization and its Aftermath

Abstract:     
With a few unfortunate exceptions the last three decades has seen reductions in inflation round the world to the point that many would argue that further improvements in price stability would offer only limited welfare gains. This experience is the result of many factors, some of which are country-specific. In this paper we seek to isolate one of the factors, namely, the improvement in the quality of monetary policy. There are two novel aspects to the study. First, we essentially estimate a gravity like model. Second, we propose generally a more exhaustive analysis of the potential role of a large number of institutional factors than has heretofore been done to date. Briefly, we find that institutional factors play a role in explaining inflation relative to the US experience, which is used as the benchmark. Nevertheless, any reduction in inflation stemming from greater central bank autonomy is a feature of the 1980s and early 1990s. Thereafter, central banks in the OECD look very much alike.

Keywords: globalization, inflation differentials, monetary policy strategy, institutional change

JEL Classification: E42, E58, C33

working papers series